BILL ANALYSIS �
AB 2523
Page 1
Date of Hearing: April 23, 2012
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
AB 2523 (Hueso) - As Amended: April 18, 2012
SUBJECT : Infrastructure and Economic Development Bank:
participation loans.
SUMMARY : Authorizes the California Infrastructure and Economic
Development Bank (I-Bank) to enter into participation loan
agreements with financial institutions for the I-Bank to
purchase participation interests in loans made or held by
financial institutions to small businesses. Specifically, this
bill :
1)Allows the I-Bank to establish a California Preferred
Broker-Dealer program (program) for the purpose of closing
financial and information gaps within the network of public
and private financial institutions and intermediaries that
serve small businesses.
2)Requires the financial institution to demonstrate a long-term
relationship with community development financial institutions
in order to be eligible to participate in the program as well
as:
a) Adhere to a prescribed set of underwriting criteria
which would be designed to meet the needs of small
businesses and provide a high-quality loan-backed security.
b) Demonstrate the ability to facilitate participation loan
agreements.
c) Commit a minimum percent of capital to any syndication
or participation agreement entered into under the program.
d) Annually report on the number of small businesses
served, jobs created, geographic locations and industry
sectors.
3)Provides that financial institutions that participate in the
program shall have priority access to guarantees under the
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Small Business Loan Guarantees.
4)Defines "financial institutions" as a banking or savings
organization, including, but not limited to, banks, savings
and loan associations and credit unions, authorized to conduct
business in California and state chartered commercial banks,
trust companies, and savings and loan associations. Financial
institutions also include nonprofit organizations that serve
as a financial intermediary and microbusiness lender.
5)Defines "participation loan agreement" as an agreement whereby
the bank would purchase portions of outstanding loans without
servicing, managing, or otherwise administrating the
underlying loan. A participation loan agreement may include
an agreement to refinance a loan or package of loans where the
term of the loan or loans to be refinanced is within 18 months
of coming due.
6)Defines "small business" as any of the following:
a) An independently owned and operated business that is not
dominant in its field of operation, the principal office of
which is located in California, the officers of which are
domiciled in California, and which, together with
affiliates, has 100 or fewer employees, and average annual
gross receipts of ten million dollars ($10,000,000) or less
over the previous three years.
b) As a business that meets the requirements under Part 121
of Chapter 1 of Title 13 of the Code of Federal
Regulations.
c) As a business that is eligible for a loan guarantee
under the California Small Business Financial Development
Corporation Law.
d) A business that is eligible for a loan guarantee under
Article 8 of Chapter 1 of Division 27 of the Health and
Safety Code.
e) A nonprofit organization that meets the size limitations
of a-d.
7)Requires the I-Bank to include in its annual report a summary
of the participation loan agreement program, including, but
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not limited to, the number of jobs impacted and created, the
number of businesses assisted, the geographic areas the
businesses were located, and the industry sectors of the
businesses served.
8)Makes various findings and declarations.
EXISTING LAW
1)Establishes the I-Bank, within Business Transportation and
Housing (BTH). I-Bank is located within the BTH Agency and is
governed by a five-member Board of Directors. The I-Bank was
created in 1994 to promote economic revitalization, enable
future development, and encourage a healthy climate for jobs
in California. The I-Bank operates pursuant to the
Bergeson-Peace Infrastructure and Economic Development Bank
Act. The I-Bank has broad authority to issue tax-exempt and
taxable revenue bonds, provide financing to public agencies,
provide credit enhancements, acquire or lease facilities, and
leverage State and Federal funds. The I-Bank's current
programs include the Infrastructure State Revolving Fund
(ISRF) Program, 501(c)(3) Revenue Bond Program, Industrial
Development Revenue Bond Program, Exempt Facility Revenue
Bond Program and Governmental Bond Program. �Government Code
Section 63000 et seq.].
2)Defines "Microbusiness lender" as a nonprofit or nonbank
lender that serves very small businesses in low- and
moderate-income communities that experience barriers in
accessing capital. These businesses are often owned by
minorities, immigrants, women, and persons with disabilities.
Microbusiness lenders generally provide loans under fifty
thousand dollars ($50,000) and offer business technical
assistance, both preloan and postloan, to improve an
applicant's ability to qualify and successfully repay a loan.
�Government Code, Section 13997.2]
3)Defines a "Financial intermediary" means an institution, firm,
organization, or individual who performs intermediation
between two or more parties in a financial context, such as
connecting sources of funds with users of funds. A financial
intermediary is typically an entity that facilitates the
channeling of funds between lenders, investors, foundations,
or other entities that have money and are interested in
connecting with businesses or communities where their money
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can be deployed. Financial intermediaries include, but are not
limited to, banks, financial development corporations,
economic developers, microbusiness lenders, and community
development organizations. �Government Code, Section 13997.2]
FISCAL EFFECT : Unknown.
COMMENTS :
According to the Author, AB 2523 is needed to, "broaden the
scope of the I-bank and its current funding programs to further
strengthen economic development of this state. Small businesses
are a vital component of California's economy. Coordinating
state-managed fund, in partnership with financial institutions,
will enhance the availability of capital for California small
business and farmers thus contributing to sustainable job
growth. "
THE I-BANK
The mission of the I-Bank is to finance public infrastructure
and private development that promote economic development,
revitalize communities and enhance quality of life for
Californians. The I-Bank has extremely broad statutory powers to
issue revenue bonds, make loans and provide credit enhancements
for a wide variety of infrastructure and economic development
projects and other government purposes. As we approach $32
billion in various financings, we continue to be motivated by
the financing challenges faced by infrastructure projects
throughout our State.
The I-Bank oversees 5 programs.
1) Infrastructure State Revolving Fund Program
The Infrastructure State Revolving Fund (ISRF) Program provides
low-cost financing to public agencies for a wide variety of
infrastructure projects. ISRF Program funding is available in
amounts ranging from $250,000 to $10,000,000, with terms of up
to 30 years. Interest rates are fixed for the term of the
financing.
2) 501(c) (3) Revenue Bond Program
The 501(c) (3) Revenue Bond Program provides tax-exempt
financing to eligible nonprofit public benefit corporations
for the acquisition and/or improvement of facilities and
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capital assets. Typical borrowers include cultural, charitable
and recreational organizations, research institutes and other
types of organizations that provide public benefits.
3) Industrial Development Revenue Bond Program
The Industrial Development Revenue Bond (IDB) Program provides
tax-exempt financing up to $10 million for qualified
manufacturing and processing companies for the construction or
acquisition of facilities and equipment. IDBs allow private
companies to borrow at low interest rates normally reserved
for state and local governmental entities.
4) Exempt Facility Revenue Bond Program
The Exempt Facility Revenue Bond Program provides tax-exempt
financing for projects that are government-owned or consist of
private improvements within publicly-owned facilities, such as
private airline improvements at publicly-owned airports.
5) Governmental Bond Program
The I-Bank is a self-supporting governmental entity that pays
its cost of operations from service fees and interest earnings
on loans and investments. The Infrastructure State Revolving
Fund (ISRF) Program, a direct loan program, was originally
funded with seed money from the State's General Fund in the late
1990's and early 2000's, and later funded with the proceeds of
tax-exempt revenue bonds described below. The I-Bank issued
approximately $150 million of tax-exempt revenue bonds secured
by the ISRF Program repayment revenues that provided additional
ISRF Program funding. The bank has leveraged the initial State
General Fund infusion to finance approximately $400 million in
infrastructure projects over the life of the program.
AB 2523 would create an additional program under the I-Bank, the
California Preferred Broker-Dealer Program for the purpose of
closing financial and information gapes within the network of
public and private financial institutions and intermediaries
that serve small businesses. Under current law, broker dealers
are regulated under the Department of Corporations (DOC). A
broker dealer under the Corporations Code Section 25004 is any
person engaged in the business of effecting transactions in
securities in this state for the account of others or for his
own account. Broker-dealer also includes a person engaged in the
regular business of issuing or guaranteeing options with regard
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to securities not of his own issue. Generally speaking,
broker-dealers are persons that act as securities dealers or
brokers or perform both functions. A broker is an individual or
firm who acts as an intermediary between a buyer and seller,
usually charging a commission. A dealer is any person in the
business of buying and selling securities for his or her own
account, through a broker or otherwise. While the program is
voluntary, it is unclear as to how the program would work under
the I-Bank and what financial institutions would participate.
Several states have participation loan programs such as New
York, Illinois, Minnesota, Vermont, Oregon, Iowa, Connecticut,
and North Dakota.
According to the U.S. Treasury, a Participation Loan Program
enables small businesses to obtain medium to long-term
financing, usually in the form of term loans, to help them grow
and expand their businesses. States may structure a
Participation Loan Program in two ways: purchase transactions,
also known as purchase participation, in which the state
purchases a portion of a loan originated by a lender; and
companion loans, also known as co-lending participation or
parallel loans, in which a lender originates a senior loan and
the state originates a second (usually subordinate) loan to the
same borrower. This program enables the state to act as a
lender, in partnership with a financial institution lender, to
provide small business loans at attractive terms.
Participation loans are considered loans that are shared by a
group of banks that join to make a loan too big for any one of
them alone. The benefits of a Participation Loan program are:
The state benefits from seeing the financial institution
lender's credit analysis, though the state should also conduct
its own underwriting of each loan.
The financial institution lender diversifies its risk by
sharing exposure with the state.
The state may decide to offer its participation at low
interest rates, which reduces the blended rate paid by a small
business.
In a purchased participation, the financial institution lender
conducts all of the customer interaction, including monthly
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invoicing, collections, and loan workouts.
Reorganization of the I-Bank: On March 30, 2012, the Governor
proposed to dismantle BTH and move programs to other existing
and new government entities. The I-Bank is proposed to be
relocated to the Governor's Office of Business and Economic
Development.
The Little Hoover Commission has 30 days to analyze the
reorganization plan and submit its recommendations to the
Governor and Legislature. The Legislature then has 60 days to
consider the plan. The plan goes into effect unless the
Legislature takes an action to disapprove the plan with a
majority of the Members in each house voting.
QUESTIONS :
AB 2523 is on the right track by allowing the I-Bank to work
with financial Institutions but then also adds the California
Broker Dealer Program. In regards to the California Broker
Dealer Program:
1)Why is the program needed and is it worth the limited
resources of the I-Bank to create and administer this program?
As written, the program is not mandated so what will it
actually accomplish?
2)How will financial institutions demonstrate a long-term
relationship with community development financial institutions
and how will the I-Bank determine this?
3)Why would financial institutions participate in such a
program?
4)How will financial institutions determine through the program
how many jobs were created and what will the I-Bank do with
this annual report? What happens if the financial
institutions do not submit an annual report?
5)A broker-dealer as referred to in this program seems to have a
very different meaning of what a broker-dealer is under
corporations code, is this intentional?
6)Do financial and information gaps exist currently that this
program will fix and if so, what needs are not being met that
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this program will fix?
AMENDMENTS :
The Committee is recommending the following amendments:
Delete the provisions of the California Broker-Dealer Program.
The program is not needed since AB 2523 gives the I-Bank the
authority to work with financial institutions on participation
loan agreements.
If it is the intent of the Author to create a Participation Loan
Program within the I-Bank then the author may want to move that
direction rather than create the California Preferred
Broker-Dealer Program.
REGISTERED SUPPORT / OPPOSITION :
Support
California Bankers Association (CBA)
California Independent Bankers (CIB)
Opposition
None on file.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081